STRATEGY’S SEVEN FATAL
FLAWS
Why Strategy Gets A Bad
Name And What To Do
About It
Let me come clean. In my experience, many successful CEOs and senior executives
resent the time they have to spend on developing strategy. There are two reasons
for this. First, strategy is seen as being difficult. Consultants and academics have
somehow succeeded in creating a misguided mystique around strategy that only
people with an IQ of 150 or more and who have attended the world’s best universities
can do it. Despite the overwhelming evidence to the contrary that demonstrates
that the best business strategies are created and led by pragmatic leaders who are
willing and able to consider alternative futures for their business, many executives
feel intimidated about their ability to create a credible strategy for growth.
Second, and more importantly, strategy development is perceived to be
irrelevant to managers’ daily and most pressing issues. Attending strategy meetings
and retreats feels like a world away from the real work that must be done, and as
the meeting progresses the frustrated executives begin to take a peek at their smart
phones so that they are able to keep up to date on what’s really happening with
their business.
To a large extent, the frustrations of these executives are not their fault, but
result directly from the way strategy is developed and managed in many organizations.
I have identified seven ‘fatal flaws’. By addressing each of these flaws, you will start
to hardwire your strategy work into the real issues and opportunities facing your
business. It will no longer be seen as separate to your ongoing operations, but will
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The CEO’s Strategy Handbook
help your managers make better decisions on a daily basis, as well as helping you to
make the big calls and create an organization that is able to thrive and grow.
So, let’s look at each of these fatal flaws in turn.
Fatal Flaw #1: Allowing Planning To Kill Strategy
What is your reaction when you hear the phrase “strategic planning”? Are you
energized by the chance to create exciting new opportunities for future profit
growth? Or are you depressed by the thought of endless form filling, requests for
further information, and periodic fights to protect your budgets? If you chose the
latter option, you are not alone. I once read a consulting firm’s survey that suggested
that less than a quarter of senior executives agreed that they made major strategic
decisions during the process.
Less than a quarter!
Figure 2.1: Strategy vs. Planning
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Strategy ’s Seven Fatal Flaws
In fact “strategic planning” is an oxymoron. It is virtually impossible to develop
a winning strategy for growth during an annual planning process. Yet too many
companies try, and fail, to combine the two tasks. The end result is typically a 1-3
year budget plan, not a coherent strategy for sustained and substantial growth.
Figure 2.1 compares a planning-led and strategy-led approach. Under a
planning-led system, the senior management team tends to start the process
with a level of growth that must be achieved in the next year or two to maintain
momentum. Using a process that is generally led by the finance department it
is, essentially, a budget exercise and the levels of growth pursued are commonly
based on the company’s current performance trends plus or minus a percent or
two. Executives and managers may talk about the strategies required to deliver the
results, but often they are simply dancing on the head of a pin. The big management
discussions are not on major issues of strategy but on detailed budgetary issues,
such as whether the gross margin target should be 32.4% or 32.5%.
In contrast, a strategy-led approach starts with a view of what kind of business
you are trying to build. Your first tasks are to clarify how you can best win in the
future, to agree your level of ambition for your company and to determine what
size and shape of organization will enable you to make this happen. Once you have
alignment on these issues, you can then determine some of the key steps you need
to take to move you from your current position to your strategic future.
Using this approach you will end up taking actions you would never even
consider under a planning-led approach. Paradoxically, it is often when companies
are facing a real crisis that they find the resolve to use a strategy-led approach
and break out of their planning-led incrementalism. At that point CEOs know that
improving margins by a couple of percent will be insufficient to deliver sustainable
success, and that bigger-thinking and more radical decisions are required. The
problem is that by then it may be too late for the business to reverse its fortunes.
Following the 2008 economic crash, for example, many of the US car makers that
have been struggling to face up to international competition, finally made some of
the major steps required to enable them to compete in the twenty-first century.
However, having failed to arrest their decline over the past 20 years, there is no
guarantee that these measures will be sufficient.
The time to drive strategy is when you’re already succeeding and the best way
to achieve that is to separate strategy development from annual resource planning,
for four good reasons:
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The CEO’s Strategy Handbook
Planning vs. Strategy
1. They answer different questions. Strategy development is focused
on how you wish to win in your chosen market, what distinctive
advantages you need to make this happen and what capabilities and
assets you require to underpin this approach. Although you will need a
robust fact base to make progress, it is as much a creative process as it
is analytical. Planning, on the other hand, seeks to identify the best way
to achieve your objectives within the resource constraints you have. It
is more about control than direction.
2. They have different timelines. Planning is required to ensure that
managers across the organization know what resources they have, and
what they are expected to deliver with them. A set timetable is required
so that when the new financial year begins everyone understands
what is expected of him or her. Strategy, however, responds to market
issues and opportunities as they emerge. There is no annual timetable
that can cater for these changes. It is not therefore surprising that few
planning processes lead to major strategic decisions.
3. They require different metrics. The end result of planning typically
comprises a profit and loss, capital expenditure and cash-flow
budget, possibly supported by some market share projections. In
short, the language of planning is financial. Metrics that help strategy
development include, but are not limited by, financials. Innovation,
speed, quality, customer satisfaction, loyalty, and brand strength can be
equally valid measures. However, such metrics are often ignored during
the annual planning process in favour of P&L projections.
4. They involve different players. Annual planning requires executive
approval and sign-off, but can often be led by a central planning team
working with line managers. Strategy development, however, requires
the active involvement of the leaders of the business. Although support
is required from other players, it is only when the leadership team
has fully argued through the merits of different alternatives to future
growth that clear strategic decisions can be taken. In short, strategy
cannot be delegated.
Don’t let planning kill strategy. By separating out strategy development from the
annual planning process you will have radically increased your organization’s chance
of identifying new opportunities for substantial future growth.
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Strategy ’s Seven Fatal Flaws
Fatal Flaw #2: Incremental Thinking
Although a planning-led approach will almost inevitably deliver incremental gains,
a shift to a strategy-led approach does not guarantee that major breakthroughs will
follow. Incremental thinking is driven as much by your own mindset as it is by a
particular process you follow. Taking a step back to look at your business is simply
not enough; you must completely change your perspective and find ways to kickstart your brain into new ideas.
There are three key factors that drive incremental thinking.
1. An unwillingness to be wrong
An unwillingness to be wrong, or, more importantly, an unwillingness to be seen
to be wrong, prevents many senior executives from proposing more radical
alternatives to their existing strategy and business model. A Business Week survey
once found that the most important factor driving the success of many of Silicon
Valley’s most successful entrepreneurs was an ability to ‘experiment fearlessly’.
If you need to be right, and you aren’t ready and willing to be wrong, you
will only take incremental steps. You will never reach out far enough to take
the actions that lead to step-change improvements. I’m not suggesting that you
should take reckless actions, but without prudent risk there is unlikely to be
material gain.
2. Unclear or limited goals.
Many of the organizations I visit either have no medium-term goals or have set
a goal or vision that is so woolly that managers cannot possibly work out what
needs to happen to achieve them. Instead, current year profit targets drive these
corporations.
Now, I’ve nothing against profit targets. On the contrary, they help create
focus and ensure accountability. However, if that’s all there is managers will find
ways to manage, and perhaps even manipulate, their activities to deliver the results
required. A longer-term goal, and potentially one that is not purely focused on
profits, can drive new thinking, different behaviors and greater commitment to the
company’s ongoing success.
The critical factor is that the goals you set are not driven by hubris or your
ego, but by an understanding of what is possible for your business if you and your
teams make the strategic and organizational changes necessary to deliver it. I
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The CEO’s Strategy Handbook
once came across an organization that had set a goal of double-digit sales growth
for each of the next five years. The only problem with the goal was that no one
believed it, not even along the executive corridor. As a result, the final budgets that
were agreed with the commercial teams were only half of the company’s supposed
ambition. Unsurprisingly, the rest of the business did not take the CEO and the
top team seriously and within a matter of months several executives had left the
organization.
In comparison, when Wal-Mart set a goal in the early 1990s of becoming a
$125 billion business by the year 2000 (equivalent to three times their existing sales
revenues) the executive team did so with a sincere belief that the goal could be
achieved if they relentlessly and persistently improved and extended their existing
business model. Success was far from certain, but it was at least possible, and the
goal was rooted in a deep understanding of the company’s capabilities and the
potential prize that was available to the business.
3. Resistance to changing the rules of the game
In the 15 seasons between August 1994 and May 2009, Manchester United, the
UK’s leading football team, played 286 home games in the Premier League. Of those
matches, United won 212 and lost only 23. Visiting sides had, on average, an 8%
chance of coming away from Old Trafford with three points, and a 75% probability
of leaving with nothing but a poorer goal difference. Not only did the visiting teams
have United’s great players to deal with, but also crowds of up to 70,000 people
or more, and match officials who may (or may not) have been intimidated by those
fans, let alone United’s manager, Sir Alex Ferguson, and his infamous stopwatch!
Few managers, planning their seasonal campaigns, look forward to the visit
to United with any kind of optimism. And yet, many businesses operate in markets
that are the equivalent of playing away at Old Trafford every week. Trying to imitate
the market leader, they effectively end up playing to another company’s rules, on
another company’s pitch, with another company’s ball. Unlike sport, you are not
tied to a particular set of rules, only to those that you decide to follow. Yet, in my
experience an executive team is ten times more likely to invest time and effort in
benchmarking the performance and strategies of their company’s competitors, than
they are in developing and articulating radical changes to create an organization
that is uniquely advantaged.
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Strategy ’s Seven Fatal Flaws
Fatal Flaw #3: Putting Financials Ahead Of Ideas
Developing a business strategy relies on creativity and idea generation far more
than it is driven by analysis. The reality is that most successful businesses start with
an idea. Some times the idea is created in a eureka moment. Paul Allen and Bill Gates,
who had been – mostly unsuccessfully – developing software for minicomputers,
saw the cover of the latest edition of an electronics periodical, which showed a
new, smaller computer that could fit on a desktop. They immediately realized
that the future of computing was the PC and that they should focus their software
development on these smaller, desktop machines. They called the makers of the PC
and, within a few weeks, had written software for the machine and started a new
company, Microsoft.
Other times the idea emerges more gradually. Fred Smith, for example,
combined his post-graduate business studies, his general observation that most
activities were becoming more automated and his experience as a charter pilot
to develop the idea of an overnight parcel delivery service using a hub and spoke
distribution model. Smith then joined the marines and it was only after he left the
armed services that he pursued his idea with earnest, and created FedEx.
In both these stories, as in most business development successes, the idea
emerges from individuals or small groups who have a strong desire to change the
world in some way, and who are able to combine their expertise and experience in
a particular niche with an insightful understanding of the broader changes driving
the markets in which they operate.
Unfortunately, most of the books on business strategy have focused on
analytical methods and tools, rather than how to create new business ideas or
how to recognize and exploit your organization’s unique experience and expertise.
Contemporary models of business strategy begin with economic analyses, and
strategy’s leading authority is Michael Porter who, in the 1980s, produced two
highly influential books, Competitive Strategy and Competitive Advantage, both of
which are focused on analytical rather than creative processes to drive strategy
development.
A certain level of analysis is essential for business strategies to succeed. But
without a greater focus on ideas, you will simply end up with a greater understanding
of your current market position, rather than a compelling basis for driving new
profitable growth for your business. Figure 2.2 compares analytical approaches with
creative approaches to strategy. Which best describes your strategy development
processes?
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The CEO’s Strategy Handbook
Figure 2.2: Analytical vs. Creative Approaches To Strategy
One of the critical differences between the two approaches is that an analytical
approach drives a need to obtain financial ‘proof ’ before taking action. In the past
I have sat in endless meetings where a manager comes to an internal forum to ask
for some initial funds for an idea, only to be faced by a group of people with no real
understanding of the idea being discussed, who then attempt to dissect it, criticize
it and find as many reasons as possible not to do it. One of the initial questions
this group will ask is “Can you show me your business plan and financial forecasts?” The
meeting will then quickly descend into a detailed examination of the financials,
rather than the quality of the idea itself. And if the initial financials are not deemed
strong enough, even if the idea has real merit and could, if properly pursued, create
significant growth, it will be dropped, often forever.
A few years ago I was working with a retailer that was looking for new growth
ideas. One of the ideas suggested was to target a new group of customers through a
non-retail channel. The potential prize was huge – up to 50% top-line growth. There
was one problem, however: the initial financial modeling suggested that the profit
margins would be only half of the margins delivered by the existing retail business.
For that reason – and that reason alone – the idea had been dropped. It took a
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Strategy ’s Seven Fatal Flaws
proactive and persistent commercial manager nearly a full year of negotiation with
the executive directors to show that, if certain changes to the new idea’s business
model were made, the profitability could increase.
Even so, the new idea is being pursued with a fraction of the resource that I
believe it warrants. If managers had put as much effort into learning about the new
opportunity through rapid trials and low-cost prototypes than it did into writing
more financial spreadsheets, both the company, and its customers, would be a lot
better off.
How would these internal forums have dealt with the initial ideas of Sergey
Brin and Larry Page, the founders of Google? The answer, we can safely assume, is
not very well. Brin and Page would have been given short shrift by these risk-averse
groups as it took them a couple of years or so before they determined how they
could turn their search engine technology into a money-making business. For Brin
and Page, as for most innovators, the idea is developed first and the business model
second.
Until your business escapes the trap of seeking financial proof before taking
action, you will always face a dearth of radical growth options and compelling
innovations to drive your strategy forward.
Fatal Flaw #4: All vision and no direction
A vision is not a strategy. Unfortunately, many executives believe that creating a
vision can equate to setting out a growth strategy. It doesn’t. Your people may be
inspired by your vision, but it won’t necessarily help them decide how they should
focus their efforts. Only when you have sufficient clarity that helps determine your
managers’ daily actions can you be confident that you have a strategy that is capable
of becoming embedded across your business.
I once worked with a retail service business that had spent a significant amount
of time and effort to set out a clear vision for the company’s future. This vision
was deeply held by the executive team and they had communicated it across the
business. The vision statement went something like this: we will be the best at what
we do in the world. The trouble, however, with such statements – that the company
will be the best, the most admired or the avatar in its industry – is that they provide
no guidance as to what you really want to achieve. As a result, my client’s retail
teams were carrying on as they had always done, and even the executive had not
particularly changed its strategic agenda. The CEO and his team had not taken
the next critical step of defining how the company was to become the best in the
world.
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The CEO’s Strategy Handbook
Figure 2.3: Strategy-related definitions
Figure 2.3 sets out definitions for several strategy-related terms that are often
confused. Samsung’s vision, for example, which states that the company will “inspire
the world, create the future”, can help its executives and teams to raise the bar on
their current levels of performance but it doesn’t articulate the markets in which the
company will participate or which customers it is targeting.
BMW’s simple strategy statement gives a clearer sense of where and how the
company should be operating. It gives guidance about how managers should be
operating, but is not completely restrictive. For example, its market or business
domain is ‘individual mobility’. This means the automobiles and motorcycles the
company already produces, but could potentially include pedal-power bicycles or
even personal jets in the future. The inclusion of ‘services’ as well as ‘products’
certainly means it will deliver its current range of financial services, but again does
not preclude the offering of broader transportation services. In short, the strategy
statement provides a framework for what the current business is, but also how it
might evolve in the coming years.
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Strategy ’s Seven Fatal Flaws
Fatal Flaw #5: A Failure To Make Trade-Offs
The corollary of identifying the core of your strategy is deciding what you’re not,
and what’s of less importance to your business. At this point we reach the dreaded
word in strategy development – trade-off. If you are unwilling to make clear and
proactive trade-offs, it is unlikely that you will have a leading position in your market
or a winning strategy.
So why is this so hard? The answer is simple. Making trade-offs means that
you’re giving something up and, if you’re not 100% confident in your stated strategy,
it is more than tempting to hedge your bets, have a look at what the competition is
doing and say to yourself “Let’s try a bit of what they’re doing.” The result is that your
own business spends all its time keeping up with the Joneses, rather than trying to
create something that is distinctive and uniquely valuable.
When I was growing up my older brothers and I used to finish our meals
as quickly as possible in the hope of getting some of the food from my younger
brother’s plate. Once we had eaten our dinner we would intently watch him eat
every mouthful, silently willing him to put down his cutlery and finish his meal.
Whenever he left some food we would collectively pounce on his plate and fight for
the scraps that remained.
There is an old medieval word for our behavior of silently and longingly staring
at someone else’s food in the hope of being offered it: it’s called groaking. And it’s
not only greedy, adolescent schoolboys who groak. Many business executives look
longingly at their competitors, wanting what they have. In particular, they look to
copy the market leader in a bid to enjoy a bit of their meal.
Corporate groaking (you might call it competitive benchmarking) results
in competitors becoming pale imitations of the #1 player. In the UK coffee shop
market, chains including Café Nero, Costa, Eat, Coffee Republic, Coffee Primo, Café
Ritazza and other local cafes were established in the hope of enjoying some of
Starbucks’ success.
The problem for the challengers is that in most markets it is only the leading
players that make meaningful returns. It is the leaders that occupy the biggest share
of buyers’ attention and spend. Unless something dramatically different comes
along that is clearly better than their current provider potential customers will be
unlikely to notice ‘me-too’ suppliers.
By seeking to copy the leaders, these challengers end up fighting over scraps
in much the same way as I did with my brothers. It is unsurprising that many of
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The CEO’s Strategy Handbook
the players in the coffee shop market have either performed poorly or even ceased
trading. There are two tests of your customer proposition and business model you
should apply to understand whether you are equipped to grow profitably:
1. Are you distinctive? Do you offer something that is dramatically different
to other players in the market? Is there something unique and
compelling about your proposition or business model that customers
immediately notice? For example, Dell offers fairly standard PC’s
and laptops, but provides customers with low prices, customized
specifications and delivery direct to their home or the office.
2. Are you advantaged? Are you able to turn this distinctiveness into
superior performance? Can you create a system to deliver your
proposition that others will find difficult to copy? Over time Dell has
built and refined a business model that is completely aligned with
its source of distinctiveness and which has created and sustained
its advantage over its competitors. For example, building-to-order
has allowed Dell to align its suppliers into a ‘just-in-time’ supply and
manufacturing system, significantly reducing the company’s working
capital, improving its cash flow and increasing its return on investment.
Fatal Flaw #6: Insufficient focus on action
Few, if any strategies emerge from implementation unscathed. By pursuing your
big objectives, implementing your initial plans and taking action you are likely to
change, in some way, the direction you have set. It is only by learning from your
actions that you can really clarify how you can best succeed in the future. The results
of your actions will drive your strategy at least as much as your strategy drives your
actions. The ideal cycle of idea generation – action, learning and refinement – is set
out in Figure 2.4. The critical aspect of this cycle is to learn as quickly and as cheaply
as you can. Your ability to create competitive advantage is, to a large extent, driven
by your ability to operate this cycle faster, cheaper and more effectively than your
rivals.
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Strategy ’s Seven Fatal Flaws
Figure 2.4: The Rapid Learning Cycle
However, the pursuit of planning ahead of strategy, a bias towards incremental
thinking and the need for financial proof ahead of the desire to develop new ideas,
all mitigate against taking action. Instead, managers spend their time perfecting
their financial models and plans and only commence delivery once they are confident
that success is virtually guaranteed. That usually means that, even in the initial trial
phase, the focus of the project is on hitting a particular financial target rather than
maximising learning. If there is any risk that the financial target won’t be hit, then
the trial will not be sanctioned and no action will take place.
The problem with this approach is that the managers are asking the wrong
question. In the early stages of developing new business ideas you should not be
asking, “Can we make sufficient returns in this area?” but should, instead, be asking
these questions:
■■ Is this idea likely to help us to become a market leader? If the idea only helps
you to play catch-up, and produces a me-too offer that imitates what’s
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The CEO’s Strategy Handbook
already out there, it may help you keep up with the pack but it’s unlikely
that it will transform your performance. If you have an idea, however,
that could take your business to the forefront of your industry, you are
likely to create the energy and focus for your organization that can’t help
but drive action.
■■ Do sufficient numbers of customers like this idea? If they don’t, then by all
means you should kill the idea (although you may find that by refining it
you get a different customer reaction), but if your initial trials suggests
that you have a potential winner on your hands, you can then begin to
work out how to create an attractive business and financial model.
■■ How do we make the idea technically feasible? Prototyping your products,
services and processes is a critical element of driving your strategy
forward. Over a five-year period James Dyson made over 5,000 prototypes
of his revolutionary bagless vacuum cleaner before creating a fully
trademarked, production version.
Figure 2.5a: How An Action-Based Approach To Strategy
Succeeds – Traditional Approach
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Strategy ’s Seven Fatal Flaws
Figure 2.5b: How An Action-Based Approach To Strategy
Succeeds – Action-based Approach
By changing the questions you ask you are more likely to drive action, learn how
to succeed and actually achieve something. Figure 2.5 demonstrates the difference
between the two approaches. At its heart is a shift in managerial mindset from
one of risk aversion and a need to have as many questions answered before
doing anything, to one where trial and error and learning through action drives
a succession of prototypes and versions that drive your business forward. In his
book, Bloomberg By Bloomberg, Michael Bloomberg, the founder of the eponymous
financial information and media empire, put it like this, “We made mistakes of course.
Most of them were omissions we didn’t think of when we initially wrote the software. We
fixed them by doing it over and over, again and again. We do the same today. While our
competitors are still sucking their thumbs trying to make the design perfect, we’re already
on prototype version No. 5. By the time our rivals are ready with wires and screws, we are
on version No. 10. It gets back to planning versus acting. We act from day one; others plan
how to plan – for months.”
Fatal Flaw #7: An overreliance on external consultants
The final fatal flaw that undermines business strategy is a reliance on external
consultants. As a consultant myself I know that, done well, working with external
consultants can add real value to the development and delivery of your business
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strategy. The problems arise, however, when CEOs and their executive teams start
to rely on these consultants for strategy, rather than working with them as partners.
This means that instead of asking the consultants for help with process and for
input on ideas, managers end up delegating to the consultants the overall strategy
itself.
Such reliance creates the following problems for executive teams:
■■ Lower levels of management involvement and ownership. Developing
and executing a great business strategy can be time-consuming and hard
work. But it is a key job of your managers, and, behind all the jargon, is
less difficult to do than many managers believe. By all means get external
support where this makes sense, but a commitment to action is driven
by a sense of ownership of the strategy, and that sense of ownership is,
in turn, driven by involvement. The most successful businesses I have
worked with all have a huge sense of ownership of their strategy, and
although their top team may work with external advisors, it is the leaders
that take the lead in setting the direction, determining the big goals and
taking accountability for their delivery.
■■ A focus on analysis ahead of action. Many consultants have followed a
traditional business school education, which emphasises analytical tools
and approaches. Unsurprisingly, these consultants tend to focus their
efforts on analysing data and producing information packs, rather than
helping the company’s managers and teams to take action. I am sure that
you have seen the data-rich ‘decks’ that consultants produce and which,
more often than not, lie undisturbed in the CEO’s filing system for years
after the work is complete. It’s not that the analysis is not accurate, but
that it just doesn’t help move the business forward.
■■ A me-too strategy. Consultants, under pressure to demonstrate their
expertise, share their knowledge of their clients’ key markets and identify
what others have done to succeed as the basis of their recommendations
for growth. Their insights and recommendations are fine as far as they
go, but they will not create true distinctiveness. It is difficult to imagine
an external consultant recommending breakthrough business ideas such
as Apple’s iTunes, Facebook or, in a previous decade, Renault’s distinctive
design of its family of automobiles. Each of these business decisions
carried too much risk to be made by consultants, and relied on the trialand-error, action-based approach that market leaders and innovators
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pursue, and that can only be driven by the company’s executives and
managers.
By all means work with trusted consultants to aid and accelerate your strategy
process, and to offer ideas and challenges to your company’s internal thinking and
priorities. But do not let the consultants take over. If you ever believe that the
consultant rather than your team has set the agenda for a strategy meeting, you
should start to be concerned. Do not be afraid of strategy – the techniques and
approaches in this book can help you take hold of the steering wheel and make sure
that you are in the driving seat, not the back seat, when setting the future direction
of your organization.
Key Points
There are seven fatal flaws that you must avoid if you are to
create and deliver an effective, high-value strategy:
■■
■■
■■
■■
■■
■■
■■
Fatal Flaw #1: Allowing planning to kill strategy;
Fatal Flaw #2: Incremental thinking;
Fatal Flaw #3: Putting financials ahead of ideas;
Fatal Flaw #4: All vision, no direction;
Fatal Flaw #5: A failure to make trade-offs;
Fatal Flaw #6: Insufficient focus on action; and
Fatal Flaw #7: An overreliance on external consultants.
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